The Tax Cuts and Jobs Act that was signed into law last month made some pretty significant changes to the way business will be taxed. The following is an overview of the highlights affecting businesses starting with the 2018 tax year.

 

Corporate Tax Rates

The Act permanently created a single tax rate of 21% for corporations.

 

AMT

AMT is repealed for corporations under the act. In the past companies had to calculate regular and AMT tax and pay whichever was higher. 

 

Bonus Depreciation

Businesses will now be able to deduct 100% of the cost of eligible fixed asset additions in the year it is placed in service. This rule applies from 9/28/17 through 2022 and then it is phased out over four years. Also, to be eligible for bonus, equipment need not be new as in the past.

 

Section 179 Expensing

Taxpayers may now expense up to $1 million in Sec. 179 of eligible fixed asset additions. The phase out threshold for Sec. 179 has been increased to $2.5 million. The definition of eligible property under Sec. 179 has also been expanded to include more property.

 

Interest Deduction Limitation

The Act imposes some new limitations on deducting business interest. In general, businesses will subject to limitations for net interest expense in excess of 30% of the business’s adjusted taxable income.  However, not all taxpayers will be subject to this limitation.

 

Net Operating Losses

Businesses will now only be able to utilize an NOL up to 80% of taxable income. However, the Act allows the NOL to be carried forward indefinitely but there will no longer be a carryback option either.

 

Domestic Production Activities Deduction (DPAD)

The Act repealed the Sec. 199 domestic production activities deduction. 

 

Meals and Entertainment Deductions

Entertainment deductions that used to qualify as 50% deductible are now disallowed as deductions. The Act denies a deduction for an activity considered to be entertainment, amusement, or recreation. The definition of 50% deductible meals is expanded to include meals provided through an in-house cafeteria or on the premises of the employer.

 

Conversion from S to C Corp

The Act specifies how distributions from an eligible terminated S Corp should be taxed. Any adjustments to income from the termination of the S Corp are taken over a 6 year period. The Act defines an eligible terminated S Corp as a C Corp that was an S Corp before 12/22/17, revoked its S Corporation election during the two years starting on 12/22/17, and has the same owners on 12/22/17 as the date of revocation. With corporate rates dropping, C Corps could be more advantageous for some taxpayers so changes in these rules can influence that decision. 

 

This legislation covers a lot more than the items we have mentioned above. If you wish to discuss how these or the many other changes in the Act could affect your particular tax situation please contact our professionals at 859-331-1717.